Community Property: Definition, Where and When It Applies
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Community property is a legal term for assets acquired during a marriage. Under community property law, both spouses have equal ownership of the assets, regardless of who acquired the asset. In community property states, equal ownership applies to financial assets, real estate, personal property, income or even debt.
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What is not community property?
There are a few cases in which community property laws may not apply, depending on state laws. Common exclusions include:
Property that was acquired before a marriage.
Property named in a prenuptial agreement.
Property that was acquired while living in a state in which community property laws don't apply. Depending on the state, there are some exceptions to this rule — more on that later.
Any gifts or inheritance received by either spouse.
Community property states
Nine U.S. states are community property states, meaning they have community property laws in place.
Each state has different rules and regulations for what constitutes community property and how to approach different living arrangements.
Some states recognize forms of domestic partnership arrangements under community property law, meaning that you wouldn’t necessarily have to be married for the law to apply.
Some states have optional community property trust laws, which allow married couples living in common-law states to convert assets into community property.
In Alaska, Florida, Kentucky, South Dakota and Tennessee, spouses can elect to hold some (or all) assets under community property laws. However, most of these states require married couples to establish a community property trust to do so.
Community property trusts are joint-owned arrangements that assign equal ownership to both spouses. The benefit of setting up a community property trust is that if one spouse dies, the surviving spouse will have a stepped-up cost basis equal to current market value for all assets held in the trust. This means the surviving spouse is allowed to replace the original purchase price with the current market value of an asset, which can help reduce capital gains taxes if they decide to sell any property.
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What if I move to a different state?
If you move out of a community property state to a common law state, the community property arrangement is terminated.
If you move from a common law state to California, Idaho, Washington or Wisconsin, any property you bring with you automatically falls under the community property laws of that state.
If you’re moving to Arizona, Louisiana, Nevada, New Mexico or Texas, property ownership won’t automatically change unless you and your spouse elect to do so.
Community property affects estate planning
If you live in a community property state, you typically cannot bequeath more than 50% of any assets you acquired during the course of your marriage to anyone other than your surviving spouse. Additionally, neither spouse can sell or give away community property without the other spouse’s consent.
Retirement accounts funded during a marriage are generally required to list the surviving spouse as the sole beneficiary unless a different arrangement is explicitly agreed to and signed by both spouses.
Divorce terminates community property terms
Most states require a finalized divorce decree to legally terminate the community property estate, even if the spouses no longer live together. Only California and Washington recognize physical separation with the intention of divorcing as grounds for termination of a community property estate.
In common law states, keeping property separate isn't required
In common law states, marital property is treated differently as each spouse is entitled to full ownership of assets or property acquired separately from each other.
Spouses in common law states can agree to a division of property as they see fit, provided that both parties sign a written agreement.